'Plenty of pain to come': Why a trade deal or fresh Chinese stimulus may not solve the trade slowdown in Asia

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  • Hope has been in the air across financial markets in early 2019, a mood in stark contrast to that seen late last year.
  • Along with a dovish shift from the US Federal Reserve, hopes of an US-Sino trade deal, as well additional Chinese stimulus, have helped to fuel optimism towards the outlook for trade flows and economic activity in Asia.
  • But, TD Securities doesn’t share that optimism, particularly when it comes to the outlook for major tech exporters.
  • It says even with a trade deal and China stimulus, “there may still be plenty of pain to come”.

Based on the recent price action, there’s optimism across financial markets, including towards the Chinese economy.

Hopes are high for a trade deal, or at least a lasting truce, between the United States and China. They’re also elevated when it comes to the prospect of fresh stimulus measures being rolled out in China to support the economy.

For many investors, those hopes have fueled buying in many cyclical assets, based upon an expectation that it will lead to an improvement in the global economy.

Emerging markets across Asia have been a beneficiary of those hopes, seeing many asset classes that were beaten up last year outperform in early 2019.

Mitul Kotecha, Senior Emerging Markets Strategist at TD Securities, has a message for those positioning from a strong cyclical upswing across the region: be prepared for your hopes to be dashed.

He thinks that even with a prospective trade deal, or additional China stimulus, it’s unlikely to delivering meaningful results for trade or demand across the region.

“Asia will not benefit greatly,” he warns.

As seen in recent data across the region, most-notably in China where the value of imports and exports recorded the largest year-ended percentage decline since the second half of 2016 in December, trade flows have weakened noticeably. It’s been reversing the strength seen in prior months, helped by a front-loading of orders before the introduction of Chinese and US tariffs.

Kotecha says those trends could easily get worse before they get better, even with a trade deal or fresh China stimulus.

“Front-loading is over and tariffs, alongside a broader based slowing in Chinese growth, is increasingly impacting Emerging Markets and Asia’s economies even as hopes of a US/China trade deal grow,” he says.

“However, market reaction to weak China trade data and worsening emerging market manufacturing sentiment has so far been sanguine given expectations that the visit of China’s top economic official, Lie Hu, to the Washington later this month will herald some form of trade agreement.”

TD Securities

Along with being skeptical about what a potential deal may bring, Kotecha says fresh China stimulus is unlikely to be the white knight for trade flows across the region, suggesting any new measures will be far less potent than what’s been previously rolled out in the past.

“While China is embarking on stimulus measures including more aggressive fiscal stimulus via large scale tax cuts and targeted monetary easing to cushion its growth slowdown, it will remain nuanced and targeted,” he says.

“Moreover, we think that Chinese stimulus is unlikely to result in an improvement in the trade outlook against the background of slowing global activity.”

With the trade data weakening at a time when the growth outlook for emerging markets is already worsening, rather than being optimistic, Kotecha warns the path ahead will be a tough for the likes of Korea, Taiwan, Singapore and other Asian tech exporters.

“Exports from these countries are weakening, with much of the down draft taking place in the electronics sector,” he says.

“This will be made worse by the fact that exporters have built up substantial inventories and will likely will reduce them before increasing production.

“There may still be plenty of pain to come for Asia’s tech exporters.”

NOW READ: A data point known as a canary in the coal mine for the global economy just fell off a cliff, and it’s a troubling sign of how bad things are in China

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